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Since the Wisconsin Supreme Court’s decision in Kontowicz v. American Standard Insurance Company of Wisconsin[i] extended entitlement to interest on unpaid insurance claims to third parties, assertion of such claims under Wis. Stat. § 628.46 has become almost a matter of routine for some personal injury attorneys. As a result, insurance defense attorneys find themselves confronting not only the liability and damage issues common to every lawsuit, but also having to defend the insurance company’s handling of the plaintiff’s initial demand for damages. This article summarizes Kontowicz and examines current application of the statute, the discovery issues arising from the defense of an interest claim, the need for bifurcation of the interest claim from the underlying dispute, and the effect of Kontowicz on settlement.

Application of Wis. Stat. § 628.46 in Kontowicz

The pertinent portions of Wis. Stat. § 628.46(1) read as follows:

Unless otherwise provided by law, an insurer shall promptly pay every insurance claim. A claim shall be overdue if not paid within 30 days after the insurer is furnished written notice of the fact of a covered loss and of the amount of the loss. If such written notice is not furnished to the insurer as to the entire claim, any partial amount supported by written notice is overdue if not paid within 30 days after such written notice is furnished to the insurer. Any part or all of the remainder of the claim that is subsequently supported by written notice is overdue if not paid within 30 days after written notice is furnished to the insurer. Any payment shall not be deemed overdue when the insurer has reasonable proof to establish that the insurer is not responsible for the payment, notwithstanding that written notice has been furnished to the insurer . . . . All overdue payments shall bear simple interest at the rate of 12% per year.[ii]

Although there has never been any question that this statute applies to claims submitted by insureds to their own insurance companies, it was not until Kontowicz in 2006 that the Wisconsin Supreme Court held that third parties were also entitled to interest on claims that remain unpaid after 30 days. The Supreme Court laid out a three-part test for triggering interest: 1) there must be no question of liability on the part of the insured; 2) the amount of damages must be in a “sum certain” amount; and 3) the claimant must provide written notice of both.[iii] This test is based in part on the “safe harbor” provision in Wis. Stat. § 628.46, which says that an insurer does not have to pay interest if it has “reasonable proof” that it is not responsible for a claim.[iv] “Reasonable proof” is essentially equivalent to a “fairly debatable” coverage issue.[v]

Kontowicz was actually a consolidation of two cases, and the Supreme Court reached different conclusions on the interest question in each of them. The first case involved plaintiff Kontowicz, who was rendered a quadriplegic after being struck from behind by a driver going almost 90 mph in a 35-mph zone. Under the circumstances of that case, where there could be no real debate about liability or that the damages exceeded the policy limits, the plaintiff was entitled to interest.

Liability and damages were not so clear-cut in the case of plaintiff Buyatt, on whose claim the Supreme Court rejected the payment of interest. Buyatt was injured when Schoessow failed to stop at a red light. Schoessow’s insurer eventually admitted liability. However, the insurer refused to pay Buyatt’s full demand because it had evidence that he had suffered similar injuries in a prior accident as well as in a subsequent accident. As a result, the court said that Buyatt’s damages could not be determined with certainty, and the insurer therefore had reasonable proof that it was not responsible “for at least a portion” of his claim.[vi]

Current Application: A Case Study

The following facts are taken from a real case in which the plaintiff asserted a claim for interest under Wis. Stat. § 628.46 as well as a claim for punitive damages because of the alleged violation of Wis. Stat. § 628.46. The trial court dismissed those claims following a motion by defendants. This case provides an example of how a claim for interest can be successfully defended.

Plaintiff’s attorney wrote to ABC Insurance Company to demand payment for his client’s injuries. He indicated that the accident was entirely the fault of ABC’s insured and requested $72,000 in damages. The demand included over $10,000 in lost wages for the plaintiff as well as $6,500 in medical bills.

Internally, the insurer estimated the insured’s share of negligence at 80%. After some discovery, the plaintiff eventually stipulated to 20% contributory negligence. Once the insurance company obtained a full set of medical records from the plaintiff’s doctor, it learned that she had failed to mention a recent report from the doctor in which he said that her injuries were not permanent. Further investigation into the plaintiff’s wage loss claim revealed that she was asserting a claim for $2,700 more than she would actually have earned during the time she was off work from the accident.

Under those circumstances, the trial court found that the insurance company had reasonable proof of non-responsibility. The plaintiff’s initial demand was incorrect on the extent of liability, the amount of medical bills, and the amount of lost wages. Therefore, as a matter of law, she was not entitled to interest under Wis. Stat. § 628.46 or punitive damages.

In applying the Kontowicz factors, the court considered the fact that the plaintiff’s demand letter sought 100% reimbursement when the insured was only 80% liable. Because liability was not clear, the claims based on Wis. Stat. § 628.46 had to be dismissed. In addition, the court pointed out the discrepancy between the true amount of wage loss and the actual amount of wage loss. This was not a “sum certain.” To the extent that the general damage claim was based on the special damage amounts, it also was not a “sum certain.” Not only is it difficult in the ordinary case to categorize general damages as a “sum certain,” it was especially hard to do so in this case, where the plaintiff’s claim for permanent injury was refuted by the plaintiff’s own physician.

Discovery Issues

Permitting third-party claimants to bring claims for unpaid interest against the insurer raises some complex discovery issues. If a fact-finder has to decide whether the insurer had reasonable proof that it was not responsible for a particular claim, then the fact-finder will want to know what information the insurer had in its files about the claim. The plaintiff’s attorney will naturally seek out information on what insurance company personnel thought about the claim and when they thought it. The problem with requests for this type of information is that this information is protected by the attorney-client privilege or the work-product doctrine.

The analysis for documents protected by attorney-client privilege is very simple and straightforward. Attorney-client privilege, properly asserted and not waived, presents an absolute bar to discovery of any matter within its scope.[vii] Thus, an insurer cannot be compelled to turn over any communications between its employees and counsel. The attorney-client privilege applies to in-house counsel as well as outside counsel.[viii]

Wisconsin Statute section 804.01(2)(c) governs discovery of work product. It provides that

a party may obtain discovery of documents and tangible things otherwise discoverable . . . and prepared in anticipation of litigation or for trial by or for another party or by or for that other party’s representative (including an attorney, consultant, surety, indemnitor, insurer, or agent) only upon a showing that the party seeking discovery is unable without undue hardship to obtain the substantial equivalent of the materials by other means.[ix]

The statute very clearly extends protection to an “insurer” as well as an attorney.

Case law in Wisconsin also holds that investigation and research overseen by insurance claims personnel is protected from disclosure as work product in most circumstances, even if performed before counsel is retained.[x] The Supreme Court has said that many of the factors applied to the attorney work-product rule are applicable to claims personnel at insurance companies “due to the peculiarly quasi-legal nature of the function they perform.”[xi] As the court explained, “much of the investigation and research engaged in by claims personnel is done with an eye towards litigation—either in actual preparation therefor, or in an effort to evaluate the necessity thereof.”[xii]

A plaintiff pursuing a claim for interest under Wis. Stat. § 628.46 will want to know why claims personnel did not immediately pay a claim. A natural place to try to obtain information about that subject is through documents in the insurer’s claims file or depositions of the insurer’s claims people. However, a claims file is going to contain work-product and privileged documents, and a deposition may reveal the mental impressions of the insurance adjuster. If such information is properly protected, then trial of the interest issue would have to proceed without all of the potentially relevant evidence being made available. If it is not protected, then the insurance company and its insured lose protections to which they are entitled.

Bifurcation

The solution to this dilemma is to seek a bifurcated trial of the underlying liability and damage issues from the section 628.46 interest claims. Courts have the authority to bifurcate claims for trial pursuant to Wis. Stats. §§ 906.11 and 805.05(2).[xiii] Wisconsin Statute section 906.11 authorizes the Court “to exercise reasonable control over a trial to insure the ascertainment of truth, to avoid needless consumption of time, and to protect witnesses.”[xiv] Wisconsin Statute section 805.05(2) provides: “The court, in furtherance of convenience or to avoid prejudice, or when separate trials will be conducive to expedition or economy . . . may order a separate trial of any claim. . . .”[xv]

The Wisconsin Supreme Court has said that it is appropriate to bifurcate trial of section 628.46 interest claims from the underlying liability and damage issues when “conducive to expedition or economy,” for convenience, or when it is necessary to avoid prejudice.[xvi] However, plaintiffs frequently oppose bifurcation, and many judges are reluctant to order the procedure for fear it will prolong the litigation. Kontowicz did not provide guidance on how this prejudice determination should be made, but the court does make a passing reference to the the Court of Appeals' decision in Dahmen v. American Family Mutual Insurance Co.

Dahmen provides strong arguments in favor of bifurcation in an analogous situation. There, the court of appeals said that, where the insured wanted to pursue both an underinsured motorist claim and a bad faith claim against an insurer, it was error to deny a motion to bifurcate.[xvii] The claims had to be bifurcated to avoid prejudice to the insurer, to avoid the potential for jury confusion, and to promote judicial economy.[xviii]

The appellate court spelled out exactly why this would be so:

In litigating a claim of bad faith, the Dahmens will be entitled to discovery of American Family’s work product and attorney/client material containing information relevant as to how the Dahmens’ claim was handled. This information would include American Family’s internal determination to deny benefits, its evaluation as to how a jury may value the Dahmens’ claim and its approach to settlement. This information would not be available to the Dahmens if they were proceeding solely on a claim for UIM benefits.[xix]

Furthermore, the court noted other concerns associated with allowing both claims to go forward simultaneously:

If a plaintiff attempting to prove the validity of a claim against an insurer could obtain the insurer’s investigative files merely by alleging the insurer acted in bad faith, all insurance claims would contain such allegations . . . . [I]f a claim for bad faith is prosecuted simultaneously with an underlying coverage claim, the discovery rule could be circumvented by simply combining the two causes of action.[xx]

The same concerns are also valid when litigating a claim for interest pursuant to section 628.46 at the same time as the liability or damage issues of the underlying claim. Trying the cases together means the plaintiffs would have the ability to request discovery of materials that would not normally be available to them if the underlying claim were tried separately. It would be extremely prejudicial to an insurer to have to reveal its thoughts, mental impressions and legal strategies to the opposing party before the merits of the claim had been decided by a jury. Since it would give plaintiffs an advantage in discovery, they would have an enormous incentive to bring interest claims as a matter of routine.

In addition to the discovery issues, the Dahmen court noted that bifurcation was appropriate because “a claim for UIM benefits is separate and distinct from a claim of bad faith.”[xxi] As a result, the evidence necessary to prove a claim of bad faith is very different from the evidence required to support a claim for UIM benefits.[xxii] Specifically, while a claim for UIM coverage turns on the amount of damages sustained by the plaintiffs, a claim for bad faith examines the insurer’s handling of those UIM claims.[xxiii]

Similarly, there are substantial differences between a personal injury claim and a claim for interest. The former requires evidence concerning liability and the extent of injuries suffered by the plaintiff, while the latter revolves around the insurance company’s handling of the claim. Though there is some overlap, there are also crucial distinctions to be made. It is one thing for a jury to conclude that it believes the treating physician’s conclusions about the plaintiff’s injuries are more plausible than the conclusions of the insurer’s expert witness; it is another thing to say that it was unreasonable for the insurer to believe its own expert. Because the evidence necessary to prove the separate claims is very different, the discovery relevant to each of the claims is also very different.

Finally, the Dahmen court said that separating the trial of the claims “increases the prospect of settlement and promotes economy by narrowing the issues for the jury and potentially eliminating the need for a later trial on the bad faith claim.”[xxiv] This reasoning will be applicable in interest cases as well. Any time the plaintiff receives less from a jury than she demanded from the insurance company, the insurer has an argument that “reasonable proof” existed that it was not responsible for a “sum certain.”

Settlement Offers

One potentially negative effect that Wis. Stat. § 628.46 could have is on the willingness of insurance companies to make settlement offers. The Kontowicz court rejected arguments that awarding interest to third-party claimants would undermine the fiduciary relationship between the insurer and the insured, or that it would have a chilling effect on settlement negotiations.[xxv] The Supreme Court emphasized the public policy behind encouraging prompt payment of claims and downplayed the risk of any negative impact on insurers and their insureds.[xxvi]

In light of the Kontowicz decision, however, plaintiffs may see a settlement offer as an implicit admission that the insurance company believes that the plaintiff’s claim is worth at least x amount of dollars. Plaintiff’s attorneys sometimes respond to an offer of settlement by saying that the plaintiff does not believe the proffered compensation is adequate but that she wishes to immediately receive that sum as partial payment on the claim. If she does not get it, she will demand interest on the sum.

As defense attorneys know, all kinds of factors go into a decision to make a settlement offer, and it is not unusual for even a case of dubious merit to be settled. An insurer that tries to resolve a case amicably should not be penalized for its efforts by being forced to pay interest. Even where a settlement offer is made, the insurer should not be held liable for interest unless all three elements of the Kontowicz test have been met.

Lessons Learned

For interest to accrue on a third-party insurance claim, liability must be clear. In Kontowicz, there was no question that the insured was 100% liable for the accident (although a seat belt defense might have provided a small reduction in damages). Where there is arguable contributory negligence on the part of the plaintiff, or if negligence may be apportioned to some other party, then liability is not clear even if it is obvious that the insured bears some responsibility for the accident.

In order to be a “sum certain,” the amount of damages claimed must not be subject to challenge. Only rarely will a claim for damages such as pain and suffering be considered a sum certain. Wage loss and medical bills may be “certain” under the right circumstances if the other conditions of the Kontowicz test are met. However, an insurer can reasonably challenge even those amounts if the plaintiff had a pre-existing condition or a subsequent injury.

Finally, documentation must be adequate. For example, a lump-sum claim for wage loss, with no breakdown of the claimant’s hourly wage or number of hours off work, should not constitute sufficient proof of loss to trigger the accumulation of interest under Wis. Stat. § 628.46. An unsupported assertion in a letter from the plaintiff’s attorney is also insufficient to satisfy the burden of proof.

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